Tom's Blog

It seems like it’s family week on my blog. Another question about doing business with family members. This one is from Helena:

Q: If my parents want to invest their money with me (instead of buying a CD at a bank) and I agree to pay them 7.5% interest, how do we structure the agreement, how & when do I pay them interest, and how do I keep track of it legally from a tax perspective? They also want to know if they can simply "write me a check" in order to purchase (if you will) the CD from me. In this example let's use $40,000... can you help me to do this the right way?

A: You are asking good questions, Helena. You need to treat this just like you would a loan from someone totally unrelated to you. You need to draft a simple note that includes all of the terms, including the interest rate, the length of the note, whether it is payable upon demand or at a specific date, when the interest will be paid (needs to be at least annually) and what happens if it is paid late.

This is a great opportunity for you and your parents to help each other. Every seasoned real estate investor knows that the more capital they have, the more money they can make due to the effects of leverage. People without the knowledge or desire to invest in real estate or a business would do well to put this money with someone who can do more with it than if they just put it into the bank.

Warmest regards,

Tom

Q: Hi Tom! My parents are getting to the age where they are going to need more assistance from me. This is where I'll be taking care of them, emotionally, physically, and financially. In terms of taxation, would I claim them as dependents or is that only for children? With my parents having no income or way to support them, and their health starting to show challenges, they unfortunately have become more and more dependent on me. Thank you for your help with this topic Tom!

A: David: Yes, your parents can be claimed as your dependents so long as:
1: They do not received significant other income (check with your Tax Advisor on the specific amount they can receive) and
2: You provide more than ½ of their support during the year (including gifts from other family members).

Warmest regards,

Tom

This question comes from Mark T. He wants to know if doing business with immediate family is "suicidal." An interesting question I'm sure many of you face. Here's my take on doing business with family.

There are some pretty good positives about doing business with family. First, you know them and should know their capabilities. Second, there should be strong loyalty bonds between family members. I have personally had some success doing business with family members. Of course, I have also had some failures. Here are some things to recognize when doing business with family members.

First, remember that you will always be family even if your business venture does not work out. For some, this creates hard feelings when a business doesn't succeed or people don't perform as expected. Communication and clear understanding is essential in this situation. I suggest you take a look at two of our courses on Informal and Formal Agreements. You can find them in our School of Wealth Strategy at http://www.provisionwealth.com/products.

Second, make sure that you have proper internal controls in place so there are no temptations for one of the partners to "borrow" from the business without telling the other partners. We also have a course on Internal Controls in our School of Wealth Strategy. Finally, be sure there is good reporting and that everyone understands that this is a business and not a charity.

If you are lending money to a family member, the best thing to do is to think of it as a gift. Don't expect repayment. Then, if you do get the money back, then you can be pleasantly surprised. If you don't, then it's no big deal as you considered it to be a gift in the first place.

Family business endeavors can be challenging. They can also be rewarding to all parties and actually increase family bonds if done right. And the only right way is to treat them as a real business and have all of the business controls and communications in place. Too often, because it's family, we make assumptions and we all know the result of what happens when we ass u me.

Warmest regards,

Tom

The most important thing we get from a business is cash flow. The temptation, of course, is to spend this cash flow on boats, vacations and other lifestyle items that don't add to our wealth. One of our School of Wealth Strategy students, however, wants to use his business cash flow to build his wealth in other investments outside his business. David asks the following question:

Q: Hi Tom! I have a business related question. Is it possible to use reinvest the positive cash flow from my business into another asset class so that my surplus funds are not just sitting in a bank account? My business is an education consulting and coaching business, and I want to use the surplus funds or profits to invest into paper assets and create cashflow through options in order to develop more cashflow. I was curious about how the taxing for this type of situation would occur, and what the cashflow from the investing would be categorized as in the book keeping. Thank you Tom!

A: Absolute yes to your first question, David. Not only is is possible, it is highly recommended. This is the way to build wealth. Here is how you do it. First, treat your business separately from your investments in your accounting. To do so, open a separate bank account in a new entity for your investing. For type of entity, speak to one of our Tax Strategists at 866.467.5809. Your new entity will have its own set of books. You will distribute out the funds from your business entity to you individually and then contribute them to your investment entity as a capital contribution. Then, you can go ahead and invest through your investment entity.

When you use the proper entity structure for your business and investing, not only do you get the best asset protection, you also reduce your taxes and maintain good records.

Everyone should follow this formula for building wealth. Use your excess cash flow for wealth building activities. Be sure you are using the right entity and maintain good bookkeeping so those entities are respected by the IRS and the Courts.

Financial freedom comes from cash flow, tax reduction and solid wealth building principles.

Warmest regards,

Tom

A lot of people are finding it lucrative right now to get into the business of buying real estate at very cheap prices and either flipping it immediately (wholesaling) or fixing a flipping. One of our students, Speed, as the following question that is fairly common among flippers:

Q: My brother and I set up an LLC to buy bulk REOs and resell them with 15yr land contracts to the new homeowner. We want to keep some of the contracts for cash flow and purchasing more REOs and we want to sell the remaining contracts to create more cash for more REOs. Can you help me understand how these are taxed within our business both the ones we keep and the ones we sell off at a discount? Anything else we should know tax wise in setting up our business and trying to scale it? Thanks.

A: Flipping is a business, so you need to treat it like any other business from a tax standpoint. This means that income will be subject to Self-employment tax if it comes through a general partnership (or LLC taxed as a general partnership) or through a sole proprietorship (or LLC taxed as a sole proprietorship). In your case, you probably want to form an LLC taxed as an S corporation.

However, before setting up your LLC, be sure to meet with your tax advisor to create a comprehensive, permanent tax strategy. While S corps can be great, they can also be very harmful. For example, in your case, if you decide to hold and rent some of the prime properties, you can get in trouble with an S corp.

For more on S corps and how to use them, see our course on Getting the Most out of Your S Corporation at http://www.provisionwealth.com/products. For more on how to formulate a tax strategy, call our office at 866.467.5809.

Warmest regards,

Tom

P.S. - Regarding your final question - number one answer is to form a team including a great team of advisors, such as a tax strategist, wealth strategist, attorney and banker.

The hottest tax topic these days is what to do with an IRA. A lot of people are fed up with mutual funds and other typical IRA investments, so they are looking to either pull their money out of their IRA, convert the IRA to a self-directed IRA, or convert to a Roth IRA.

One such person is one of our School of Tax Strategy students, Lillian. Lillian asks the following question:

Q: How can I save the most taxes for next April when I cash out part of my IRA? It is not a Roth, it's a mutual fund type that increases and decreases depending on the market. I am also thinking about coverting some of it into a self-directed IRA.

A: If you are not yet 59 ½ years old, then you will be taxed at ordinary income rates for any money you pull out of your IRA plus a penalty tax of 10%. You can convert any part of this to a self-directed IRA without paying any tax, so long as you do a trustee-to-trustee direct transfer (you don’t actually touch the funds). This year, you can also convert to a Roth IRA without any penalty and you just pay the tax. I have written previous blogs on the conversion to a Roth IRA that you may want to read.

For the portion of the funds you want to take out, not much you can do. There are some exceptions to the penalty rule, but they don’t give you much control over the funds so I tend to ignore them. The real question is what are you going to do with the funds? If you are going to spend them for personal purposes (vacation, home, etc.) then you really will just have to pay the tax and penalty.

There are some investments that give you great tax benefits right off the bat that would help reduce the tax hit from the withdrawal, such as oil and gas investments and certain real estate investments. Still, I suggest you meet with your Wealth Strategist and formulate a wealth strategy first and then meet with your Tax Strategist to decide how to handle your IRA.

For more information about ProVision Wealth and Tax Strategists, call our office at 866.467.5809 and ask for Gennifer.

Warmest regards,

Tom

One of my favorite types of investing is Angel Investing. With Angel Investing, you invest in a start up company with huge potential and with good management. Our question today comes from Brian, who is interested in investing in other companies in a significant way. Here is his question:

Q: I am currently focusing on building green technology and environmentally friendly companies as a repeat business builder. However, after about 10 years, I would like to settle down to my life's wealth vision. I see myself operating a private investment business remotely from my caribbean home and yacht. I have control over when I want to invest my money to build my wealth further, so I can pick up anytime and spend time exploring the globe with family and friends. My question is related to the private equity and venture capital firms vs. how I desire investing. I want to invest in energy technology companies and nonprofit companies in all stages of growth with a diversified portfolio within green technology and and non-profit with regards to capitalization of the companies, but always investing to take a minimum of 10% interest in the company of interest and continue to build my position overtime as the company grows. Can I do this remotely via technology and decide when I want to invest without operating an active private equity fund or venture capital fund, but still build a team of advisors to help me make informed decisions? I guess I am trying to wrap my head around the technicalities of investing at this level and in a more passive than active role considering I want controlling interest in the companies I fund. Also, would you comment on whether this would be considered business or paper, since I will be a passive private investor and dealing with stocks, debt, and derivatives to acquire the companies? Thanks for you help in clarifying my expectations and vision. It get more exciting everyday with focus.

A: So, Brian, you want to control companies without working in them on a day-to-day basis. Sounds like you would like to be a VC (Venture Capitalist). VC’s always want to control the companies they invest in. VC’s normally come into a start up not only with capital but also with management expertise. They want to turn around a company, build it and sell it. They put in lots of hours to do so.

I wonder, though, whether you want a controlling interest in a company you are not working. As the majority owner, you will be at the most risk for the company’s success. Personally, I would rather look at investing in more companies as an Angel investor if I were not wanting to be actively involved in the company. This spreads out the risk.

You will want to be certain that each company has excellent systems and reporting set up, including internal controls and accounting systems. For more on this, see our series of wealth strategy courses at www.provisionwealth.com/products.

This would also be an interesting question to discuss on one of our monthly calls, so feel free to bring it up on our next call as well.

Warmest regards,

Tom

In this economy, lots of people are getting laid off. Good people who work hard and are dedicated to their employer. One of these, Savas, sent in the following terrific question about his situation.

Q: Dear Tom, My name is Savas and I would like to ask you a rather complicated question. I had an food import and distribution business since 1999 up to 2008 which was closed due to lack of financial intelligence and bad advising, and I then worked as an employee in a toy company for 1,5 years, from I was fired last month due to the recession (I doubled checked with them, I always went the extra mile). So, when the problems started in my business I came across Robert Kiyosaki's and philosophy and I recently attended a seminar you had. So my question is what kind of advice would you give in a person like me, to start over and create wealth? Everybody says to continue be an employee, pay my debts , and climb the corporate ladder, however this is not me. What would you do if you had no funds to invest? How would you start? Thank you so much, Seeking desperately for advice, Savas

A: I have been in this situation before, Savas. I worked for a company that was a good company and laid off many employees who were good employees simply because the economy lagged at the time. I myself was fired from another company. Let me share a few thoughts with you.

The challenge I have with being an employee is that you are at so much risk all the time. You really have no control over your life. You cannot even earn more money by working more if you are salaried. I like the idea of having multiple customers, not just one (employer). That’s why I started my company. After I lost my job, I was concerned about my family and what would happen if I continued to look for jobs and then be at risk.

Also, it sounds like you enjoyed being an entrepreneur. That’s very important. I’m like that. After my first year in business, I told my wife that I would never go back to being an employee, no matter how difficult it became financially. Making this strong of a decision was important, so I wouldn’t look back and wonder. And I love being an entrepreneur. The control over your life, the amount you can contribute to other’s lives, and the lower risk by having multiple customers is great.

I suggest you go through our Strategic Wealth Coaching program. It is designed to get our clients who want to be entrepreneurs into the right business for them and then get them in a position where they are always improving their business and their life. Call Gennifer at 866.467.5809 and she will set up a time for us to talk.

Warmest regards,

Tom

This question comes from Vita:

Q: What are the advantages of foreign-filing your Nevada LLC to do business in another state vs. just forming an LLC in that state to begin with?

A: This is an excellent question. I hear all the time from people who have heard attorneys tell them they should always form in the state in which they are doing business or other attorneys who say to always form outside of the state in which they are doing business. The reality is that both of these answers can be correct, depending on your facts and circumstances and on in which state you are doing business.

My general rule is that if you are doing business in your home state and you plan on residing there for the foreseeable future, you probably should simply form in that state. The reason? You are going to be sued in that state anyway, regardless of where you are formed.

On the other hand, if you plan on leaving the state sometime soon, then it’s generally a good idea to form in a good, non-tax state that is outside of your state, such as Wyoming or Nevada. In addition, there are certain states that have bad LLC laws, such as Florida, California and Colorado due to recent court cases that give uncertainty as to the asset protection afforded to LLC’s in these states.

Most importantly, talk to your tax advisor AND your attorney. I’m not qualified to give legal advice. These are simply my rules of thumb as a tax advisor. My friend, Garrett Sutton, is an attorney who generally prefers his clients to form in Nevada or Wyoming. You can contact him at www.sutlaw.com.

For more information about the basics of asset protection, go to our course on asset protection at www.provisionwealth.com/products.

Warmest regards,

Tom

Just to show you how similar the UK tax laws are to the US tax laws, here is a question from one of our members in the UK. A UK ISA is very similar to a US Roth IRA, only a UK ISA can only invest in cash and stocks (shares). Thank you, Diane, for asking this question.

Q: Hi Tom! I currently have a UK ISA, which in 11 years should mature circa £198,000. Presently it's sitting at £61,000 BUT has a 'significant warning...' marker against it's potential to reach the £198,000. With 132 months left and payments of £595 per month = a further £77,540 + the curent value of £61,000 = total as it stand right now of £139,540, it would seem that it would have to perform exceptionally well if it's to reach £198,000, which is unlikely given the warning marker against it. What are your thoughts on withdrawing the £61,000 (tax free), and re investing this, along with the current monthly payments of £595 back in real estate please? Thanks Tom.

A: The first thing I do in evaluating something like this is to run the numbers. After all, investing is all about the numbers. So, I went to the FREE ProVision Wealth Evaluator (http://www.provisionwealth.com/wealth_evaluator.asp) to determine what the rate of return would have to be to reach the expected goal of £198,000. The answer is 11% per year.

Yes, Diane, that is a very aggressive goal for the stock market. Still, should you invest it in real estate? I don't know. The answer lies in your wealth strategy. What asset category have you determined to use to build your wealth? This is the subject of our two courses, "Massive Passive Income" and "Building Your Wealth Strategy." You probably have these courses if you purchased our 49 Secrets package at the Rich Dad London event. If you don't, go to http://www.provisionwealth.com/products and purchase them from our School of Wealth Strategy. These courses will walk you through how to determine the right asset category you should invest in.

You definitely can reach your goals much faster once you have the knowledge and education to take control of your assets, rather than turning them over to an investment advisor. I am a big fan of taking control of your assets, your investing and your life.

If you are interested in a personal wealth coach to help you along the way, please call our offices at 480.467.4400 and ask for Gennifer. She will help you get started.

Warmest regards,

Tom